Return to surplus adds to heat on yuan

Solid export growth helped China post a small trade surplus last month, and the rebound from a deficit in ­February is likely to maintain pressure on the world’s second-largest economy to allow its currency to rise faster.

The trade surplus of $US140 million was a marked turnaround from the $US7.3 billion deficit in February, but it was not large enough to keep China from recording its first quarterly trade deficit since 2004.

China’s trade surplus, especially with the United States, has fuelled calls for the government to allow the yuan to appreciate at a faster pace to help rebalance the global economy. The yuan closed at a record high of 6.5354 to the US dollar on Friday.

A Group of 20 industrialised nations’ seminar in Nanjing on March 31 highlighted the debate over the yuan. US Treasury Secretary
Timothy Geithner
declared that managed currencies “the most important problem to solve in the international monetary system today".

He did not mention the yuan.

However, some economists expect China’s trade surplus to shrink owing to the rising value of imports, especially of oil, the price of which is hovering at 2 ½ - year highs. Chinese exports rose 35.8 per cent in March to $US152.2 billion. Imports rose 27.3 per cent to a record $US152.2 billion.

A quarterly trade deficit of just over $US1 billion was the first since 2004.

China has said the pace of appreciation of the yuan will be determined by an assessment of the impact on its economy, not by the demands of foreign governments. There are concerns that a higher yuan would hurt the profits of Chinese exporters, who face rising costs of raw material and labour.

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But the US has kept up the pressure on the Chinese government to allow the yuan to rise faster, believing it provides Chinese exporters with an unfair competitive advantage. The Obama administration has a target of doubling US exports over five years.

The US Treasury has postponed its semi-annual currency report, due on April 15, until after the US-China Economic and Strategic Dialogue next month. It has so far resisted declaring China a currency manipulator but has said there has been “insufficient" progress in allowing the yuan to appreciate.

The US argues that allowing the yuan to rise more quickly would help Chinese policymakers in their fight against inflation, which is above the government’s target of 4 per cent.

On Friday China will release its March consumer price index, which is expected to show an increase in yearly inflation to 5.2 per cent from 4.9 per cent, and its March quarter gross domestic product estimate (forecast to slow to a 9.5 per cent annual pace from 9.8 per cent).

The debate over the yuan and the size of China’s trade surplus is likely to come into focus later this week when the People’s Bank of China reveals its latest estimate of the country’s foreign exchange reserves.